Levi Strauss may use high coupon, Libor floor and call protection to entice investors

By Sara Rosenberg

New York, Sept. 12 - Levi Strauss & Co. is anticipating paying a hefty coupon, stipulating a Libor floor and granting call protection in order to attract investors to its upcoming credit facility, which has relatively loose covenants, according to market sources.

The San Francisco brand name clothing company is scheduled to hold a bank meeting on Tuesday for a new $1.15 billion credit facility, consisting of a $650 million asset-based revolver maturing in 2007 and a $500 million senior secured term loan maturing in 2009.

"It's going to be pretty juicy. Probably north of Libor plus 500 on the term loan," a fund manager said. "The revolver is an asset-based deal so it will probably be seen around Libor plus 275. There's probably going to be a Libor floor. Preliminary talk is 2%. There's probably going to be some call protection. I would imagine on the call protection it would be at least two years. That's kind of the standard. [For investors] to get all this, [Levi's] covenants will probably be pretty loose."

However, a 500-plus basis points spread, 2% Libor floor and two-year call protection "may not be enough," the fund manager added, considering the recent rating agency actions, investigation into accounting practices and covenant problems under the existing credit agreement.

"Off the bat it sounds interesting, but I'd be a little skeptical. It sounds like they're calling accounts and saying, here's what we're thinking, what's your feedback?"

On Thursday, Moody's Investors Service put Levi on review for possible downgrade including its $750 million senior secured bank facilities at B1 and $1.6 billion of senior unsecured notes maturing through 2012 at B3.

Moody's said the review was prompted by Levi Strauss' announcement that it could not be certain it would be in compliance with all of its financial covenants in its existing credit facility dated January 2003, and that it would seek a temporary waiver until it could execute a refinancing of the credit agreement.

Moody's said it is concerned about the rapid decline in the company's financial flexibility under its recently executed credit agreement and year-to-date results that were weaker than Moody's had expected when it assigned the ratings, particularly in the areas of sales, higher working capital needs and higher debt levels.

On Wednesday, Standard & Poor's downgraded Levi including cutting its bank debt to B+ from BB and notes to B from BB-.

S&P also attributed the action to the company's announcement that it will seek a temporary waiver under its existing credit facility as it finalizes a $1.15 billion refinancing of its current secured bank credit facility and accounts receivable securitization program.

Year-to-date results have been well below expectations because of a weak economic environment and continued apparel price deflation, which will likely continue for the foreseeable future, S&P added.

Security on the deal is a little different than many institutional investors are used to due to the presence of the asset-based revolver. "The revolver will get first lien on working capital assets. The term loan will probably get a second lien on those assets. The term loan will have a first lien on any Levi's trademark and any assets like that," the fund manager said.

Bank of America is the lead bank on the deal, which is expected to be completed within the next several weeks.

Proceeds from the new financing will replace the company's existing senior secured credit facility consisting of a $375 million revolver and $365 million term loan, as well as $110 million of debt arranged under an accounts receivables securitization.

Another new deal slated for next week that has generated some buzz is DRS Technologies Inc.'s $512.5 million credit facility, set to launch via a bank meeting on Thursday.

Bear Stearns and Wachovia are the lead banks on the deal, which consists of a $362.5 million term loan B and a $150 million revolver.

"I heard Libor plus 275 on the term loan. I would imagine the revolver will probably be the same thing," a fund manager said.

Proceeds, combined with proceeds from a bond offering, will be used to help fund the acquisition of Integrated Defense Technologies Inc.

"I think they're paying a lot for the company they're acquiring. But I would imagine [that the new deal] would do fine. DRS has done a pretty good job of integrating any acquisition they've done in the past. [And] defense budgets are pretty large so they've been doing pretty well," the fund manager added.

Under the acquisition agreement, DRS will acquire all of the outstanding stock of IDT for $17.50 per share in cash and DRS common stock, subject to a collar. DRS will pay $12.25 in cash and 0.1875 of a share of its common stock for each IDT share.

The cash portion of the acquisition, together with the debt of IDT to be refinanced, will total approximately $437 million at closing. Total consideration for the acquisition, including an estimated $175 million of IDT's net debt to be refinanced, is approximately $550 million, representing a multiple of 1.5x the revenues and 8.5x the EBITDA expected to be contributed by IDT during DRS' next full fiscal year ending March 31, 2005.

The transaction is expected to close by the end of this year, subject to customary regulatory approvals and other closing conditions.

DRS is a Parsippany, N.J. supplier of defense electronic products and systems.

Lastly comes next week's second largest deal - Dobson Communications Corp. - which raised some questions on Friday as the company opted to increase its bond offering to $650 million from $600 million.

"We haven't decided what to do with regards to the upsize of the bonds," a syndicate source said when asked whether the credit facility would be downsized by $50 million.

Dobson is set to launch a $700 million senior credit facility on Tuesday, consisting of a $550 million 6 1/2-year term loan B and a $150 million six-year revolver. The company has some bonds maturing in seven years so the syndicate opted to leave some room in between the bank and bond maturities to avoid any investor hesitation, which explains the slightly unusual tenor of the institutional tranche.

One particular idea that seems to have attracted positive sentiment for the deal is the integration of two credit facilities - the Dobson Operating Co. credit facility and the Dobson/Sygnet credit facility - into one, a market source previously told Prospect News. By combining the two facilities, the company is not only simplifying its capital structure but its taking bank debt leverage below two times, the source explained.

At June 30, approximately $484 million was outstanding under the Dobson Operating Co. credit facility and approximately $267 million was outstanding under the Dobson/Sygnet credit facility.

In addition to repaying bank debt, proceeds from the bank facility and the bond offering will be used to refinance and replace outstanding borrowings under the existing credit facilities, to fund the repurchase of Dobson/Sygnet Communications Co.'s 12¼% senior notes and to fund the repurchase of a part of its $250 million outstanding 12¼% senior preferred stock.

Lehman Brothers and Bear Stearns are joint lead arrangers and book managers on the deal, and Morgan Stanley is an underwriter as well.

Dobson is an Oklahoma City provider of rural and suburban wireless communications services.

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